What is the company?
3P Learning (ASX: 3PL). It is a software-as-a-service (SaaS) education technology company that owns and develops online education products in maths (Mathletics) and literacy (Readiwriter). It also distributes a third-party product called Reading Eggs, which is an online reading program. The company dominates the Australian/New Zealand primary school market, with a leading position in the UK and an emerging business in the USA.
The SaaS architecture in education applications, such as Mathletics, can deliver on the promise of genuine, interactive, personalised, and dynamic syllabus-based learning for kids, while providing valuable time-saving reporting tools for teachers.
How long have you held the stock?
We acquired our initial holding in 3P Learning in 2015, shortly after its IPO in 2014. The company subsequently disappointed the market with the share price bottoming out in 2016. We increased our position approximately three-fold in 2017.
What do you like about it?
3P Learning passes our ethical screens based on its contribution to human happiness, dignity, and education. There are many factors that appeal to us and make 3P Learning a favoured investment. Firstly, we like the thematic around the growing use of digital tools in schools and believe the adoption of true SaaS applications, like Mathletics, is still in its infancy. 3P Learning also generates sales internationally, so there is a global investment angle, which we like. Additionally, we appreciate its strong cashflow and subscription-based business model, with relatively low levels of annual churn. The balance sheet looks good, with debt expected to be eliminated by 30 June 2018. Finally, 3P Learning holds a potentially saleable investment in fast-growing SaaS based assessment technology company Learnosity. This investment was acquired in 2015 at book cost of $46.3 million, with Learnosity revenues more than doubling since.
3P Learning CEO, Rebekah O’Flaherty, appointed in 2016, has right-sized and digitalised the business, strengthened the product portfolio, and overseen the development of Readiwriter. We believe 3P Learning is fairly priced for where the business is today. We see good upside if O’Flaherty can grow the top line in 2019 and beyond.
How is it better than its competitors?
3P Learning has around five million students globally using its learning tools and has previously won several learning and innovation awards for its flagship Mathletics product. The product suite is targeted, and adaptive learning based, as well as having global reach because of its adaptable curriculum. The global online education space is competitive and highly fragmented, but, as many competitors fail to make money, we see scope for consolidation.
What do you like about its management?
Upon being appointed, O’Flaherty unveiled a comprehensive three-year strategic plan to turn around the business at the end of 2019. She has stabilised the business, equipped the company digitally, and done plenty of product work, including the development of Readiwriter. We like the fact the O’Flaherty is delivering on her strategic plan and will be watching to see if she returns the company to double-digit revenue growth.
What is your target price?
The current share price is reasonable for where the business is today. We see good upside in this name if the company can accelerate sales in 2019 and beyond. A $2.00 share price in the next year is not unrealistic.
At what point would you sell it?
We are fundamental investors and would consider selling any stock when the share price exceeded our valuation. We also take into account the share trading liquidity in any sell decision.
How much has it added to your overall portfolio over the last 12 months?
We have tripled our position in 3P Learning over the last 12 months and currently hold around 2.5% in our flagship Australian Ethical Australian Shares Fund.
Where do you see value?
The stock trades at 14-times 2019 earnings before interest and tax, if we credit the enterprise value with the book value of Learnosity. This is a discount to Australian software peers. An investment in 3P Learning today is about backing management to grow revenues in 2019 and beyond. We like the scalable business model and see solid prospects for top-line growth from the new literacy offering, expansion of global sales, and language diversification of Mathletics.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
